China's Economic Prowess Predicts Geopolitical Change

May 14, 2009 6:55 AM ETCNY, UUP10 Comments
Jeff Nielson profile picture
Jeff Nielson

The heart of the global economy has moved East, yet the necessary economic, institutional, and political adjustments are still in their infancy. However, events this spring strongly suggest a steady acceleration in reshaping the geopolitical map.

On the economic front, changes are more rapid. There has been a clear decoupling between the Chinese juggernaut and the 'old' economies of the U.S. and Europe. China, which first passed the U.S. in automobile production, has now also surpassed the U.S. in automobile consumption.

China's domestic economy continues to explode, with annual growth consistently above 20% per year. With remarkably little disruption, China is making the transition from an export-dependent economy to a much more domestically-oriented economy – with the rising incomes and huge pool of savings among China's 1.2 billion people providing the long-term support necessary for such a fantastic level of growth.

In the process, China has become the “engine” of the global economy, replacing the United States. As Chinese consumption becomes a dominant economic force, this in turn is radically altering trade relationships. Obviously, the emerging economies of Southeast Asia are now totally dependent on Chinese economic strength for their own prosperity.

However, a recent article in The Telegraph shows that this trend has become global. Brazil, which itself is one of the world's new “economic tigers”, recently announced that China had replaced the U.S. as its largest trading partner – for the first time in more than 70 years.

China is further cementing its new status by aggressively negotiating large, economic deals with other nations, from currency-swaps with six “emerging market” economies, to a huge petroleum deal with Russia, and a vast array of smaller, commodities-based economic deals. The combination of macroeconomic forces and this series of economic agreements is forcing various institutional changes, which thus far have lagged economic developments.

Chinese currency-swaps are clearly part of a long-term goal of the Chinese government to replace the U.S. dollar with the Chinese “renminbi”as the world's new “reserve currency”. This process has been boosted by simultaneous calls from China, Russia, and other nations to introduce an IMF “currency” - as a transition measure to “wean” the world off of grossly over-valued U.S. dollars.

This is crucial not just for China, but for most other global economies. With the U.S. burdened with debts which exceed those of all the rest of the world, combined ($50 TRILLION in existing public/private debt + another $50 TRILLION in unfunded liabilities), many economies are at risk of being dragged down by the U.S.

The only way for the U.S. to postpone bankruptcy is to rapidly devalue the U.S. dollar – as this has the effect of significantly reducing the real value of all those trillions of debt, through dilution of the currency. Even if the U.S. government didn't choose a devaluation of its currency, the only thing keeping the U.S. Treasuries “bubble” from an horrific crash is that the Fed has been printing dollars to buy-up U.S. Treasuries.

This is known as “monetizing debt” (i.e. printing new money in order to pretend to pay its bills). History is clear in this regard. No nation has ever been able to “monetize” its debt without paying a steep price in currency devaluation.

To fuel this trend much more quickly, the currency swaps of the Chinese government significantly reduce demand for U.S. dollars by eliminating the need to hold them for international trade. Concurrently, China has authorized six of its largest trading-cities to also begin using the renminbi and not the U.S. dollar for their international trade transactions.

Added on to this, there has been a catastrophic decline in foreign demand for U.S. paper – of all kinds. This is a large part of the reason why the Fed has already been forced to start “monetizing” debt. On a supply/demand basis alone, the U.S. dollar is doomed to a long, steady decline – with no equilibrium value visible at any price level.

The inevitable devaluation of the U.S. dollar must speed-up the transition to a new, “reserve currency” for one very important reason: as was seen prior to the recent economic collapse (when the U.S. dollar was also steadily falling), maintaining the U.S. dollar as reserve currency “exports” high, U.S. inflation to all other economies.

In “emerging market” economies, and those with “pegs” to the U.S. dollar (including China), such inflation is a special hardship on the populations of these nations. Having endured this pain once, these countries do not want to face those price-pressures again.

The divergent goals of these economies compared to the 'old' economies of Europe and the U.S. mandate changes to global institutions. The primary targets, initially, are the World Bank and the IMF. There can be no justification for the U.S. and Europe to cling to their totally dominant positions in these institutions – when the global economy is now driven by China, along with a growing collection of other economies around the world who are now in China's “economic sphere of influence”.

After those institutions have either been overhauled, or simply replaced by new, Asian-based entities, the next target after that would be the United Nations. However, prior to any significant changes there, which would obviously be strenuously resisted by the U.S. and Europe, there must be a radical alteration of the geopolitical paradigm.

With China steadily replacing the U.S. in economic dominance in bilateral relations, the U.S. is simultaneously facing out-of-control deficits, with a Soviet-style debt-implosion imminent. This necessitates massively slashing U.S. spending. An inevitable “casualty” of such budget-cutting is the U.S.'s military “presence” – in well over 100 countries around the world.

Stripped of its economic dominance, the U.S. will find it increasingly hard to justify a military presence in countries who will be much more focused on their bilateral relationship with China then their previous ties to the U.S. Over time, the combination of growing Chinese economic dominance and waning, U.S. military “influence” will inevitably result in totally reshaping geopolitical dynamics.

The 21st Century “belongs” to China – and we are all about to witness China asserting that claim.

This article was written by

Jeff Nielson profile picture
Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada ( He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world. It also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world's most-promising discoveries.

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